Dallas Fed: Energy sector slump a 'small shock'

There are few indicators a real recession is right around the corner, economist says.

By Daniel J. Graeber

The recent slump in the energy sector is a relatively minor
shock to the broader U.S. economy, an economist with the Federal Reserve
Bank of Dallas said. File Photo by ekina/Shutterstock

A stronger U.S.
dollar and last year's decline in the energy sector could be a "small
shock" that weakens economic expansion, a Texas economist said.

A November decision from the Organization of
Petroleum Exporting Countries to limit production starting in 2017
helped establish a $50 per barrel floor under crude oil prices, which in
early 2016 dipped below the $30 mark.

In late December, Federal Reserve Bank of Dallas economist Keith Phillips said that weakness in the state economy that started in 2016 has given way to a sense of stability in the energy and manufacturing sectors. The outlook for expansion in 2017 was "slightly better," he said.

Recovery has been slow for Texas. The Dallas
Fed said, nevertheless, there should be a 1.5 percent growth in
employment for 2016, an upward revision from a previous estimate of 1.2
percent.

Anton Cheremukhin, a senior economist at the Federal Reserve Bank of Dallas, said there were pressures remaining on the broader economy nevertheless.

"The most recent energy plunge, coupled with
the strengthening of the dollar, could be the small shock that
temporarily defuses the competitive pressure and prolongs the current
expansion," he wrote.

Minutes from the December meeting of the U.S.
Federal Reserve revealed a sense of optimism based in large part on
strong labor figures across the country and modest gains in inflation,
which is still below the 2 percent objective.

In Texas, the steady rise in crude oil prices
has supported increased spending on exploration and production. The
independent Texas Alliance of Energy Producers estimated about 205,675
people in Texas were working in the exploration and production side of
the industry, about 32.8 percent less than the peak in December 2014

Cheremukhin said there are few indications to
suggest a recession is right around the corner. Some measures, like wage
growth and personal consumption spending, are below what they would be
in a recessionary prelude.

"Nevertheless, the U.S. economy is in a
fragile state and a large enough shock could throw the economy into a
downturn," he wrote.